Earlier this month I came across an article in the Wall Street Journal that reported on how hedge fund manager John Paulson earned $5 billion in 2010. Though I initially found the story some what interesting, it did not really capture my imagination. After all, what’s new about a bunch of really rich people throwing buckets of cash at a flavor-of-the-day hedge fund manager, who in the process becomes even richer than they are! The 2% asset management fee and 25% cut of profits is probably seen as a fairly small price to pay for the privilege of having Gordon Gekko be your personal banker.
However, after giving it some thought, I realized that the really were some compelling aspects to this story. For those of you who don’t know, John Paulson is the founder and president of New York-based hedge fund, Paulson & Co. which manages approximately $36 billion in client assets. His reputation was earned in 2008 when he made an extremely well timed (some say too well timed) wager on the impending collapse of the sub-prime mortgage market. In 2008, Paulson recorded investment gains of 590% and 350% in two of his funds within the firm through the purchase of credit default swaps, earning himself $3.6 billion, a then-record payday for any hedge fund manager in history.
Paulson’s ascent into the stratosphere of alpha male earners was slightly blunted in 2009 when he took a slightly slimmer pay check of $2.3 billion. His funds saw investment returns of 12%, which was highly respectable given the armageddon chaos that rocked the market for most of that year.
Come 2010 and John Paulson really made up for that 36% income decline. The $5 billion he personally netted in 2010 trumps the record he set in 2007-2008 betting against sub-prime mortgages. To put that figure into perspective, consider that Goldman Sachs, Wall Street's most profitable and notorious bonus machine, paid all of its 36,000 employees a total of $8.35 billion last year. A mere $3.35 billion more than Paulson got paid!
So you’re probably wondering, how did he do it? Well, approximately $1 billion came from the 20% performance fee his hedge fund charged on $5 billion in investment profits, as well as the annual management fees clients pay to keep their assets at the firm. The remaining $4 billion came from investment gains he saw on his own personal holdings, (i.e.) from being his own best client. At the beginning of the year, Paulson had approximately $10 billion invested with the firm, a sum that rose by $4 billion throughout the course of the year.
Though Paulson did not hit any out-of-the-park home runs in 2010, given that two of his primary funds rose 11% and 17% respectively, he juiced his returns by creating leveraged gold-denominated versions of his five funds. Paulson & Co. borrowed 20 cents for every $1 invested in its funds which was used to buy exposure to $1 of gold futures. This meant that investors had $1 of gold exposure for every $1 invested in other strategies. The 30% rise in gold prices last year resulted in the gold-denominated versions of Paulson’s funds seeing gains of as much as 45%.
However, after giving it some thought, I realized that the really were some compelling aspects to this story. For those of you who don’t know, John Paulson is the founder and president of New York-based hedge fund, Paulson & Co. which manages approximately $36 billion in client assets. His reputation was earned in 2008 when he made an extremely well timed (some say too well timed) wager on the impending collapse of the sub-prime mortgage market. In 2008, Paulson recorded investment gains of 590% and 350% in two of his funds within the firm through the purchase of credit default swaps, earning himself $3.6 billion, a then-record payday for any hedge fund manager in history.
Paulson’s ascent into the stratosphere of alpha male earners was slightly blunted in 2009 when he took a slightly slimmer pay check of $2.3 billion. His funds saw investment returns of 12%, which was highly respectable given the armageddon chaos that rocked the market for most of that year.
Come 2010 and John Paulson really made up for that 36% income decline. The $5 billion he personally netted in 2010 trumps the record he set in 2007-2008 betting against sub-prime mortgages. To put that figure into perspective, consider that Goldman Sachs, Wall Street's most profitable and notorious bonus machine, paid all of its 36,000 employees a total of $8.35 billion last year. A mere $3.35 billion more than Paulson got paid!
So you’re probably wondering, how did he do it? Well, approximately $1 billion came from the 20% performance fee his hedge fund charged on $5 billion in investment profits, as well as the annual management fees clients pay to keep their assets at the firm. The remaining $4 billion came from investment gains he saw on his own personal holdings, (i.e.) from being his own best client. At the beginning of the year, Paulson had approximately $10 billion invested with the firm, a sum that rose by $4 billion throughout the course of the year.
Though Paulson did not hit any out-of-the-park home runs in 2010, given that two of his primary funds rose 11% and 17% respectively, he juiced his returns by creating leveraged gold-denominated versions of his five funds. Paulson & Co. borrowed 20 cents for every $1 invested in its funds which was used to buy exposure to $1 of gold futures. This meant that investors had $1 of gold exposure for every $1 invested in other strategies. The 30% rise in gold prices last year resulted in the gold-denominated versions of Paulson’s funds seeing gains of as much as 45%.
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